Who’s back? Harry Dent, the self-styled “economic futurist,” who presumes to tell us about the great economic booms and busts that lie ahead.

How can he possibly know these things?

According to Dent, an analysis of the “highly predictable” nature of consumer spending based on demographic trends – increasing spending during child-rearing years, peak spending as the kids leave home and slower spending during late work and retirement – reveals what lies ahead for the economy and the stock market…

Harry Dent: Dow 44,000 & Other Flimsy Forecasts

Harry Dent is a man worth listening to. After all, he has a near perfect track record – as a contrary indicator…

For example:

• With less than auspicious timing, Dent brought out The Roaring 2000s Investor in 1999, confidently predicting that the Dow would hit 44,000 by 2008. With the luxury of hindsight, we now know he was off by 30,000 points or so.
• At the time, Dent also argued forcefully for NASDAQ stocks, predicting, “The technology revolution will favor Internet-oriented companies.” Within three years, the NASDAQ lost three quarters of its value and the leading index of Internet stocks plummeted 89%.

And Dent didn’t confine his market predictions to the U.S. He further forecast that Argentina would see “moderate growth until 2015 and then stronger growth into 2025.”

No, Argentina would suffer a currency collapse and financial crisis followed by rioting, social unrest and years of economic stagnation.

It’s obvious now just how wrong Dent was. But 10 years ago, plenty of brokers and investors agreed with him. He sold hundreds of thousands of books and raked in millions as an advisor to top Wall Street firms, including Morgan Stanley (NYSE: MS).

Harry Dent’s Next Bold Prediction: The Great Depression Ahead

Five years later, bloodied but unbroken, and using his same demographic trends theory, Dent published The Next Great Bubble Boom: How to Profit from the Greatest Boom in History: 2006-2010.

Well, no. That period encapsulated the biggest bust since the Great Depression. As for his revised forecast of Dow 40,000 in 2009, it looks like he’s off by 30,000 or so points again.

With a track record like this, you might imagine Mr. Dent would shy away from economic prognostication.

Yet he’s promoting a new book. And if you’re looking for a reason to be optimistic about the market, you’ll find it in his chosen title: The Great Depression Ahead.

Within weeks of the book’s publication, the Dow began a 48% ascent, one of the six biggest rallies in the last 100 years.

Look, I’m not entirely unsympathetic to Mr. Dent. Anyone in the investment prophecy business needs the skin of a rhino and a Ph.D. in humility. No one gets it right all the time.

Moreover, Mr. Dent has made hundreds of predictions in his long career, so I’m sure he can point to a few successes. (Of course, so can an orangutan heaving darts at the stock pages.)

It’s just that Dent has made millions in book sales and investment advisory fees peddling this mumbo-jumbo.

(Poor advice does have its consequences, however. His AIM Dent Demographic Trends fund severely underperformed the market and was quickly folded into another fund. His name was quietly dropped.)

Yet Mr. Dent is still out there, offering dubious investment advice based on faulty premises.

The truth, of course, is this…

Forget Harry Dent… Listen to This Advice Instead

While anyone can make a good call from time to time, no one can consistently predict the economy or the stock market.

If you don’t accept this – a fundamental investment tenet with great investors from Benjamin Graham and Warren Buffett, to Peter Lynch and John Templeton – your chances of long-term success are slim.

Yet Mr. Dent clings to his demographic theories and economic futurism. And that’s unfortunate.

Someone really ought to let him in on one of the great secrets of investing: Your only real mistakes are the ones you don’t learn from.

Good investing,

Alex

Source: Harry Dent: Bold Predictions of the Great Depression Ahead

Do Corporate Insiders Really Have All the Answers?

Let’s start with an obvious fact: To a great extent, the future is always cloudy. Corporate insiders don’t know what the market is going to do any more than you or me.

For example, Vickers was already ringing the alarm back in July, noting that insider selling to buying was 4.16-to-1, the highest ratio since the market’s all-time high in October 2007.

Jonathan Moreland, editor of Insider Insights, concluded at the time that insider behavior “seems totally inconsistent with this rally continuing unabated.”

Yet that’s exactly what’s happened in the two months since.

It’s important to understand that there is no piece of data – or combination of data – that will tell you in advance what the market is going to do. You might as well put on your lab coat and start trying to turn iron into gold.

Why Form 4 is Important When Watching Corporate Insider Activity

History shows that corporate insiders have excellent predictive powers, but not about the market. Sometimes they turn bullish long before the market bottoms. Sometimes they sell heavily way before the market tops.

What is important, however, is what companies they’re buying. (You’ll notice they’re not plunking for index funds.)

The unfair advantage that insiders have is a lot of material, non-public information about their own companies. That’s why they’re required to file a Form 4 with the SEC within two days of any purchase or sale of their own company’s shares.

What do corporate insiders know that you don’t? Plenty…

Corporate Insiders Profit From Vital Information… And You Can, Too

Corporate insiders have access to crucial information that other investors don’t. For example…

• Top executives and board members generally know the direction of sales since the last quarterly report.
• They know whether the company has gained or lost any key customers or employees.
• They know of any new products or services that are about to be announced.
• They know of any unexpected expenses, legal problems, or whether there is about to be a product recall.
• They know whether the company is ripe to receive an unsolicited takeover bid.

It pays to keep a close eye on what insiders are doing. Not so you can know what the market will do, but because you can discover which stocks are most undervalued (and therefore likely to outperform the market).

It’s tough to get a better buy signal than when you see top executives buying significant amounts of their own company’s stock with their own money at current market prices.

Just remember: The important factor is not the aggregate ratio of insider sellers to buyers in the market. It’s how heavy and widespread the insider buying is at those companies that are experiencing it.

History shows that those stocks are likely to be superior investments, no matter what the market has in store.

Good investing,

Alex Green

Source: What Corporate Insiders Are Telling Us

Sell stops ensure that your capital is protected and your profits don’t slip through your fingers.

However, one subscriber took me to task, saying that a trailing stop guarantees you won’t “sell at the top.”

Quite true.

However, “selling at the top” and its corollary, “buying at the bottom,” are not realistic investment goals. Here’s why…

The Danger of Selling High and Buying Low

For one thing, you never know the top or the bottom until you’re looking in the rear view mirror. And given enough time, all-time highs and lows are usually exceeded.

For example, you may sell a stock at its 52-week high – not a good idea since you should always let your winners run – and find that it goes on to double or triple from there. Likewise, if you buy at the all-time low, the stock may head still lower (after all, that’s the direction it’s heading).

Our trailing stop policy works, in part, because it accepts the uncertainty that is an inevitable part of equity investing. Sure, you may get lucky and buy at the bottom or sell at the top from time to time. But hoping to “get lucky” isn’t much of an investment strategy.

And there’s yet another iron-clad reason to use trailing stops…

How Trailing Stops Can Maximize Your Gains & Mitigate Your Losses

It’s a little-known but depressing fact that the vast majority of individual stocks post negative returns over the long run.

This may come as a shock to those who’ve been told that equities are the very best long-term investment.

• But research by the investment management firm, Dimensional Fund Advisors, found that form 1980 to 2008, the top-performing 25% of stocks was responsible for 100% of the gains in the broad market.
• The bottom 75% of stocks collectively generated annual losses of 2% over the past 29 years.

It’s pretty sobering to realize you were three times as likely to own losing stocks as winners.

However, this data makes the fundamental assumption that you actually held all these stocks over the entire period.

Many stocks make spectacular runs before crashing and burning. By using a trailing stop, you could have participated in an awful lot of upside without sticking around for the Battle of Little Big Horn.

Likewise, even if you picked a stock that went south immediately, a trailing stop would have kept your losses small and acceptable.

Don’t Argue With the Market… Use Trailing Stops Instead

The bottom line is this: Anyone can plunk for a few shares. Getting out at the right time is the true art of investing.

The key is to make sure you’re cutting your losses and letting your profits run.

Emotions like fear and greed (and hope) can prevent that. But trailing stops enforce a discipline that takes the emotion – and the second-guessing – out of the investment process.

Understand that market prices reflect facts about a company better than opinions. So don’t argue with the market.

When you buy a stock, enter a trailing stop below it to protect your principal. And as the stock rises, keep raising the stop to protect your profits.

This is the best way for you to minimize your losses and maximize your gains – even if some of the stocks you own are on their way to Waterloo.

Good investing,

Alex Green

Source: Investing Without Trailing Stops: Here’s Why 75% of Stocks Are a Sucker’s Bet

Whenever a recommended stock closes 25% below its closing high – or our original recommended price – we sell, no questions asked…

Why do we do this? Number one, a stock trader needs to have a sell discipline or he’s simply flying by the seat of his pants. Anyone can plunk for a few shares. But getting out at the right time is the true art of investing.

Your timing will never be perfect, of course. No investment system devised will ever beat the uncanny success of hindsight.

But the key is to always cut your losses and let your profits run. Easier said than done, however…

Using Trailing Stops to Overcome Emotion and Second-Guessing

Emotions like fear and greed (and hope) often get in the way. Even professional investors and money managers are prone to rationalizing.

But using a trailing stop enforces a discipline that takes the emotion – and the second-guessing – out of the investment process. Prices reflect the facts about a company better than individual opinions. So we don’t argue with the market.

However, some investors tell me they are just too busy to keep up with the trailing stops on their stocks. This makes no sense. It’s tantamount to a driver telling you he doesn’t have time to keep his eyes on the road.

Fortunately, Richard Smith, President and Founder of Tradestops.com – and a PhD in mathematics – has a solution…

A Foolproof Sell Alert Service

Tradestops specializes in helping individual investors protect their profits and investment capital.

The service is straightforward. On the site you can enter the stocks you own, your price paid and the percentage trailing stop you want to use.

If any of your stocks close beneath your selected stop, Tradestops sends you a text message – to your cell phone, e-mail account, or page – alerting you.

Tradestops not only covers all three major U.S. exchanges, but London and Toronto, as well. It can even alert you to stops on your mutual funds and option positions.

Some firms, like Fidelity, offer trailing stop alerts with their accounts. But they generally expire after 30 or 60 days. TradeStops’ information never expires. It’s important to note, though, that Tradestops notifies you, not your broker. It does not enter sell orders.

Personally, I prefer it this way. Anyone who has seen “2001: A Space Odyssey” doesn’t want HAL taking over their account trading.

With Tradestops:

• You can track up to 50 stocks at a time (and whenever you stop out of one, you can replace it with another).
• Tradestops even offers a 30-day risk-free trial.
• Tradestops is easy to use (it’s specifically designed for technophobes) and it’s reasonably priced.
• Ordinarily, the cost is $7.95 a month or $79.50 a year. (If you’re an Oxford Club member, you get a special rate of $39.95 a year.) There are also additional services available for dedicated short-term traders who want even more.

For complete information, feel free to visit: www.Tradestops.com.

And, remember, if you own individual stocks, trailing stops are essential. They don’t just help cut your losses and let your profits run… they guarantee it.

Good investing,

Alex

Source: Trailing Stop Discipline: How to Know When to Sell Your Stocks

Since March 9, the S&P 500 is up 48%. The small-cap index, the Russell 2000, is up 65%. The EAFE international index is up 67%. And the MSCI Emerging Markets index is up 79%.

Yet five months ago, investor sentiment was black as Halloween night and equity mutual funds were experiencing massive outflows.

How did millions of investors get it so wrong?

The short answer is they didn’t know what they didn’t know. They didn’t know that the economy can’t be reliably forecast and the stock market can’t be consistently timed. They didn’t know that abject pessimism is the long-term investor’s best friend.

Why We Were Never Heading Into Another Great Depression

And, perhaps most importantly, they didn’t know that it was never likely that we were heading into another Great Depression.

Read your history. The Depression was caused by policy errors: tight money, higher taxes and protectionist legislation.

The Federal government has done a lot of things wrong since this economic crisis began. But it hasn’t been so foolish as to make the same mistakes it did almost 80 years ago.

• The Fed has taken short-term rates to zero, a powerful tonic.
• Bernanke is flooding the system with money.
• Plus, Uncle Sam is spending money like there’s no tomorrow. (Too much, in fact.)
• And there have been no trade wars with foreign nations.

Bear in mind, economic knowledge in the 1930s was like medical knowledge in the Victorian era. We’ve come a long ways since then. No one is going to bleed the economy with leeches.

The Gloom-&-Doomers See Clouds in Every Silver Lining…

Yet the gloom-and-doomers, the folks who see the cloud in every silver lining, have never understood this.

Not only have they completely missed out on the stock market’s big gains, but the highest-yielding money market in the nation yields less than 1%. Gold is stuck in neutral. And many with the strength of their convictions are holding double-short funds that have lost most – or nearly all – of their value.

These investors never seem to realize that the media delivers the world through a highly distorted lens.

When you hear five times a day that…

• The economy is in contraction
• Unemployment claims are increasing by more than 400,000 a month
• The U.S. housing market is spiraling down
• Consumer spending is anemic
• Business investment is down and credit is tight

…It’s tough to muster much confidence to buy stocks.

The Greatest Buying Opportunities of Our Lifetimes

But as I wrote in this space just one week before the market bottomed:

“Irrational exuberance is as dead as Che Guevara. And while true contrarianism is by definition a lonely business, 10 years from now this market is likely to be viewed as one of the great buying opportunities of our lifetimes. Many investors will disagree, of course. And that’s fine. As George Santayana famously said, ‘Those who cannot learn from history are condemned to repeat it.’”

It hasn’t take 10 years, of course. Or even 10 months. (Although it’s unlikely that we’ll see this bull market reach much higher levels without a few interruptions.)

Two of our core principles are:

• Number one, owning a diversified portfolio of profitable businesses is the best way to protect and enhance long-term wealth.
• And number two, the best time to buy will always be when the majority of investors are despondently selling.

Yes, these principles have served us in good stead.

That’s why we call them principles.

Good investing,

Alex

Source: How Did Millions of Investors Get It So Wrong?

In the roaring bull market of the 90s – and since – his book was required reading. Millions of investors were strongly influenced by his research.

In the process, Siegel became a celebrity, appearing regularly on network and cable investment shows. He is also now an advisor to WisdomTree Investments, a sponsor of exchange-traded funds.

But while history once buttressed Siegel’s grand conclusions, current events haven’t been so kind…

More specifically, as of June 30, U.S. stocks have underperformed long-term Treasury bonds over the past five, 10, 15, 20 and 25 years.

Zweig Argues Against Siegel’s Methodology

To add insult to injury, Jason Zweig recently argued in The Wall Street Journal that Jeremy Siegel’s methodology was flawed from the beginning. It turns out that Siegel’s chosen stock market indexes and dividend calculations from the 1800s were not representative of the period, skewing returns upward.

“Another emperor of the late bull market,” Zweig concludes, “has turned out to have no clothes.”

But what’s the real story here: Are stocks not the best long-term vehicle? Are bonds – or something else – better? Is Siegel just plain wrong?

The answer to each of these questions, it seems, is yes and no.

Bonds have outperformed stocks over the last 25 years in part because yields at the starting point – during the hyper-inflationary early 80s – were sky high. From current low levels, outsized returns like these are impossible.

(That doesn’t mean, of course, that equity returns couldn’t still lag them.)

And we can quibble about how equity returns were calculated in the 1800s, but let’s be serious. What difference does it make exactly what “stocks” returned when investors were swapping certificates – along with fox and beaver pelts – under a shade tree beside a dirt road.

That scenario bears little resemblance to modern financial markets.

The Real Reason To Invest In Stocks

No, the real reason to invest in stocks is because it allows the average investor to hold a liquid,diversified portfolio of profitable businesses, something that would otherwise be cost prohibitive for most.

Granted, the economy is tough right now. But businesses can always respond to adverse circumstances.

• During recessions, a business can cut costs, lay off unnecessary personnel and refinance debt at lower levels. During inflationary times, businesses can pass on higher costs to customers. Even the burden of higher taxes and greater regulation – both underway – are ultimately passed along to consumers.

In short, we will always have economic needs. Yet it is not government that provides us with food, clothing, shelter, health care and other essential goods and services. It is business.

• Businesses exist to meet our needs and, in the process, maximize profits for shareholders.
• Business ownership has always been the most reliable route to financial independence. And owning a diversified portfolio of fine companies should continue build and safeguard capital.

Just don’t make the mistake of believing that anything is guaranteed or that the future will look just like the past.

As the late, great Peter Bernstein said in the Preface to the first edition of “Stock for the Long Run“:

“When all is said and done, the future will always remain hidden from us. The past, no matter how instructive, is always the past… Professor Siegel so rightly warns readers of this when he writes that ‘the returns derived from the past are not hard constants, like the speed of light or gravitation force, waiting to be discovered in the natural world. Historical values must be tempered with an appreciation of how investors, attempting to take advantage of the returns from the past, may alter those very returns in the future.’ Although the advice set forth in this book very likely will yield positive results for investors, the odds are higher that uncertainty will forever be your inseparable companion.”

Source: Dr. Jeremy Siegel: Are Stocks Still The Best Long-Term Investment Vehicle?

Investors are further assured that the stocks held in the index have nothing to do with borrowing or lending, women’s fashions, cosmetics, modern cinema, popular music, or pork.

Personally, I wouldn’t touch this fund with a barge pole. It is virtually guaranteed to earn sub-par returns.

Here’s why…

Investing in Sin Stocks vs. Socially Responsible Stocks

If you were given the choice six years ago between investing in the environmentally and socially responsible Sierra Club Stock Fund (Nasdaq: SCFSX) or investing in sin stocks with the Vice Fund (Nasdaq: VICEX), which invests primarily in tobacco, alcohol, defense and gambling, which would you have chosen?

I’ll give you a hint. Your profits would have been much bigger if your conscience weren’t your guide.

• The Sierra Fund has delivered negative returns over the past six years.
• The Vice Fund has delivered positive performance – and beaten the S&P 500 handily, too.

This is no aberration.

Merrill Lynch recently examined the performance of alcohol, tobacco and casino stocks in all recessions since 1970 and found that while the S&P 500 fell 1.5% on average, sin stocks rose an average 11%.

This downturn isn’t shaping up to be any different.

Sure, consumers are cutting their spending far more than in past recessions. But history shows that people do not drop their bad habits in hard times.

Rather many people feel an intense need to escape through alcohol, tobacco, or a trip to their local casino.

This is not too surprising.

If a citizen of ancient Greece or Rome were magically transported into the modern era, he would be astounded by the current state of agriculture, transportation, housing, medicine, architecture, technology and general living standards.

Humanity itself, however, would offer few surprises. We remain the flawed human beings we have always been, struggling with the same deadly sins our ancestors wrestled with millennia ago: greed, gluttony, sloth, pride, anger, envy and lust.

Investing in Sin Stocks Through The 7 Deadly Sins

Given this reality, when it comes to investing in sin stocks, four months ago The Oxford Clubunveiled its new Seven Deadly Sins Portfolio.

It is already up 41%, more than 10 times as much as the S&P 500.

We locked in a 92% profit in the casino stock Wynn Resorts (Nasdaq: WYNN) in 64 days. Our shares of Smith & Wesson (Nasdaq: SWHC) have doubled in less than four months. All but one of our positions are up over 20%.

Why are these vice stocks outstripping the broad market by such a wide margin? One answer is careful security selection.

But two other studies out of Yale and Princeton offer a further rationale.

• One study attributes vice stock outperformance to the lack of attention pension and other institutional investors pay to these stocks in order “to maintain an aura of respectability.” (That creates opportunity.)
• The other believes it’s because companies in sin industries benefit from high barriers to entry, thanks to strict regulations and taxation.

These factors are not likely to change.

I’m not endorsing the sin industries, incidentally.

I don’t smoke and I hope my kids never do. I don’t gamble unless the stakes are negligible. And I don’t own a handgun, although I am a supporter of Second Amendment rights.

Why Would Anyone Invest in Sin Stocks?

So why would I consider investing in sin stocks and these types of companies?

• Because my investment portfolio is a vehicle for achieving and maintaining financial independence, not for making grand moral statements.
• Consumers and investors have every right to patronize or own any legal, publicly traded business that creates jobs, pays taxes and allows citizens to enjoy their many freedoms.
• Moreover, you only need look at Afghanistan under the Taliban to see what a society unleavened by political, religion and economic freedoms looks like.

Last month French President Sarkozy made news when he said the burqua – a symbol of the repression and subjugation of women – “is not welcome in France.”

Shariah law isn’t welcome in my portfolio either. And the returns have been superb because of it.

Source:  Investing in Sin Stocks: How to Oppose Radical Islam in Your Portfolio

If you are a closed-end investor, try a tax-free fund like Nuveen Insured Municipal Opportunity Fund (NYSE:NIO), trading at a 10% discount to its net asset value and yielding over 6% paid monthly.

Or, to avoid annual expenses and have the certainty of a final value on a particular date, buy individual tax-free bonds.

But whatever you do, buy them now. Let me count the reasons why you should…

Three Reasons Why Municipal Bonds Make A Good Investment Now

1. Ten-year municipal bonds, while down from the historic premium they reached a few months ago, are yielding as much as 10-year Treasuries. But while Treasuries are taxable, munis are not.
2. Most municipal bonds are safe. Yes, a few areas – particularly in California and Alabama – are troubled. But the historical default rate on municipal bonds is just 0.3%.
3. Taxes will soon be going higher. A lot higher.

Yes, I know that when President Obama was Candidate Obama, he promised a tax cut for 95% of Americans. But that was then.

The Fallout From The Government’s Massive Spending Spree

Since that time, we’ve seen the federal government…

• Ride to the rescue of General Motors and Chrysler.

• Pass a massive $787 billion economic stimulus.

• Spend hundreds of billions more to recapitalize banks, bail out insurance companies and “fix” the mortgage market.

Now, the Obama administration is proposing the biggest changes to the healthcare system since the advent of Medicare in 1966. It’s planning to spend billions more to lighten our dependence on foreign oil and reduce carbon emissions. And it’s urging policy makers to rewrite the rules governing the entire U.S. financial system, spending who knows how many billions more.

As for candidate Obama’s promised tax cut, I’m reminded of the remark former Clinton aide George Stephanopolous once made to Larry King, “The President kept all the promises he intended to keep.”

The consequences of all this new federal spending and encroachment into the private sector won’t be fully apparent for years to come.

But the wild fiscal imbalance is already crystal clear. Washington politicians will soon demand that you sacrifice even more of your paycheck so that they won’t have to sacrifice the near erotic charge – and high incumbency rate – they get from spending it.

This is ironic when you consider that to a large extent it was government that landed us where we are today…

The Buck Stops With The Federal Government

Sure, the mortgage boom and housing market bust was due in part to shameless lenders, greedy borrowers, and unscrupulous Wall Street types. But who set the stage for them?

Who took short-term interest rates to the cellar, creating a massive incentive for consumers and investors to borrow? The federal government.

Who gave real estate investors a $500,000 tax exemption on their profits from flipping houses every two years? The federal government.

Who passed laws criminalizing banks’ failure to lend to subprime borrowers? The federal government.

Who set up quasi-government institutions Fannie and Freddie  – or, as I prefer, Phoney and Fraudy – to warehouse those bad mortgages, leaving taxpayers to pick up the tab? The federal government.

And what will we get as a result of this supposed “failure” of the free market system? More federal government.

I’m not sure whether to laugh or cry. But I am sure our Founding Fathers must be spinning in their graves.

How To Combat The Growth Of Government… And Taxes

Thomas Jefferson said, “That government is best which governs least.”

George Washington said, “Government is not reason, it is not eloquence, it is force.”

No wonder polls show that more than 60% of Americans are skeptical of increased government intervention in the economy.

They suddenly recognize that we’re in for a lot more government, a lot more “market failure”… and a lot more taxes.

Sadly, there isn’t much you can do about it… except buy munis now.

Source:  How To Fight Back Against The Government’s Imminent Tax Hikes

• Buy them through Vanguard if you are a mutual fund investor. (The average fund company charges expenses six times higher than Vanguard’s.)
• If you are a closed-end investor, try a tax-free fund like Nuveen Insured Municipal Opportunity Fund (NYSE: NIO) trading at a 10% discount to its net asset value and yielding over 6% paid monthly.
• Or, to avoid annual expenses and have the certainty of a final value on a particular date, buy individual tax-free bonds.

But, whatever you do, buy them – now.

Tax-Free Bonds: Why It’s Time To Buy Them

So, why is now the time to buy tax-free bonds? Let me count the ways:

• Ten-year municipal bonds, while down from the historic premium they reached a few months ago, are yielding as much as 10-year Treasuries. Treasuries are taxable. Munis are not.
• Most municipal bonds are safe. Yes, a few areas – particularly in California and Alabama – are troubled. But the historical default rate on municipal bonds is just 0.3%.
• Taxes will soon be going higher. A lot higher.

Yes, I know that President Obama, when he was candidate Obama, promised a tax cut for 95% of Americans. But that was then and this is now…

In the meantime, we’ve seen the federal government:

• Ride to the rescue of General Motors and Chrysler…
• Pass a massive $787 billion economic stimulus…
• Spend hundreds of billions more to recapitalize banks…
• Bail out insurance companies…
• And “fix” the mortgage market.

Now the Obama administration is:

• Proposing the biggest changes to the health care system since the advent of Medicare in 1966.
• Planning to spend billions more to lighten our dependence on foreign oil and reduce carbon emissions.
• Now urging policy makers to rewrite the rules governing the entire U.S. financial system, spending who knows how many billions more.

As for candidate Obama’s promised tax cut, I’m reminded of the remark former Clinton aide George Stephanopolous once made to Larry King, “The President kept all the promises he intended to keep.”

The Consequences of Federal Spending & Encroachment

The consequences of all this new federal spending and encroachment into the private sector won’t be fully apparent for years to come.

But the wild fiscal imbalance is already crystal clear. Washington politicians will soon demand that you sacrifice even more of your paycheck so that they won’t have to sacrifice the near erotic charge – and high incumbency rate – they get from spending it.

This is ironic when you consider that to a large extent it was government that landed us where we are today.

Sure, the mortgage boom and housing market bust was due in part to shameless lenders, greedy borrowers, and unscrupulous Wall Street types. But who set the stage for them?

• Who took short-term rates to the cellar, creating a massive incentive for consumers and investors to borrow?
• Who gave real estate investors a $500,000 tax exemption on their profits from flipping houses every two years?
• Who passed laws criminalizing banks’ failure to lend to subprime borrowers?
• Who set up quasi-government institutions Fannie (NYSE:FNM) and Freddie (NYSE:FRE) – or, as I prefer, Phoney and Fraudy – to warehouse those bad mortgages, leaving taxpayers to pick up the tab?

The answer? The federal government.

As The Free Market System “Fails”…

And what will we get as a result of this supposed “failure” of the free market system? More federal government.

I’m not sure whether to laugh or cry. But I am sure our Founding Fathers must be spinning in their graves.

• Thomas Jefferson said, “That government is best which governs least.”
• George Washington said, “Government is not reason, it is not eloquence, it is force.”

No wonder polls show that more than 60% of Americans are skeptical of increased government intervention in the economy.

They suddenly recognize that we’re in for a lot more government, a lot more “market failure”… and a lot more taxes.

Sadly, there isn’t much you can do about it… except buy munis now.

Good investing

Alexander Green

Source: Tax-Free Bonds: Why Now is the Time to Buy Munis

There was more money available to buy shares than at any time in almost two decades. The $8.85 trillion held in cash, bank deposits and money market funds was equal to 74% of the market value of U.S. companies, the highest ratio since 1990, according to the Federal Reserve.

What happened in the past when cash reached these levels?

• In September 1974, cash on hand reached $604.5 billion, representing a record 1.21 times the U.S. stock market’s capitalization. That preceded a 31% gain in equities between October 1974 and March 1975.
• In July 1982, just as a 20-month bear market was ending, cash as a percentage of the U.S. stock market’s value rose to 95%. The S&P 500 began a six-month, 36% advance. According to Bloomberg, the eight previous times that cash peaked compared with the market’s capitalization, the S&P 500 rose an average 24% in six months.

This time, of course, it didn’t take nearly as long for the market to rally.

Still, the greatest appreciation so far has been in smaller stocks. That’s normal in an early bull market. But if the bull market continues, the big, blue-chip stocks are likely to lead the market higher for two key reasons:

• First, there is still over $8 trillion on the sidelines earning next to nothing in short-term deposits. Investors tip-toeing back into the market are likely to gravitate here since these stocks are the safest.
• And then there is the growing influence of cash-rich sovereign wealth funds…

Sovereign Wealth Funds – The Financial Assets of a Country

Sovereign wealth funds are the financial assets of a country – usually part of the national savings – that are owned and organized into a state-controlled fund and put to work to earn a higher return on investment.

(Sovereign wealth funds are not the same entities as foreign exchange reserves, which are often used for short-term currency stabilization and liquidity.)

In the past, most countries put their liquid assets to work in foreign currency deposits, government bonds or gold. (The hard-working Japanese and Chinese, for example, have kept our interest rates low by maintaining a steady appetite for U.S. Treasury obligations.)

But with the dollar relatively weak and interest rates on Treasuries near record lows, U.S. government bonds are not generating the kind of returns you write home about.

So world governments are slowly moving money into global equity markets. And the sums involved are fairly staggering.

Sovereign Wealth Funds Control More Than $7 Trillion…

According to The Economist, sovereign wealth funds already control more than $7 trillion today. The exact amount is impossible to ascertain due to lack of transparency.

But China, Saudi Arabia, Singapore and the United Arab Emirates alone are known to control more than $2 trillion. And more money is being allocated to these funds all the time.

What does this mean for you as an investor?

Expect to see cash coming off the sidelines to accumulate shares of the largest, most liquid firms around the globe. Quite frankly, they are the only companies that can easily absorb buying on this scale.

For example, take a look at the Dow Jones Global Titans Fund (NYSE: DGT). It holds the world’s 50 largest publicly traded companies.

World-Class Diversification in a Blue-Chip Portfolio

When you buy this cheaply valued blue-chip portfolio, you’re getting world-class diversification.

Companies like:

• Exxon Mobile (NYSE:XOM),
• IBM,
• Proctor & Gamble (NYSE:PG),
• Wal-Mart (NYSE:WMT),
• Coca-Cola (NYSE:KO),
• Nestlé,
• Toyota Motor (NYSE:TM),
• Roche Holdings,
• Samsung Electronics

… Are just a few of the names that are major holdings of the DGT fund.

These firms will almost certainly be an early stop for U.S. investors who get frustrated with low yields and start venturing back into the game.

These same companies are a natural home for sovereign wealth funds – and the growing trillions they control.

History shows that cash on the sidelines always grows itchy with time. The Dow Jones Global Titans (NYSE: DGT) is a good way to take advantage of it – ahead of the crowd.

Good investing,

Alexander Green

Source: Sovereign Wealth Funds: $7 Trillion Reasons to Stay Invested